What is Position Trading?
Position trading is amongst the most popular strategies to trade in financial assets. One can make a huge amount of money through this strategy. However, before using it, a trader should become well-versed in its concept. In this article, we will conduct an in-depth study of the position trading strategy with its examples, features, pros, and cons.
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Position trading is a long-term strategy for holding a trade position for several days, weeks, or months to profit from an asset’s price fluctuation.
Position traders generally use a combination of technical and fundamental analysis to make trade decisions.
- Psychological Benefit
- Passive Trading
- Leverage
- Simplicity
- Big Capital Requirement
- High Trading Cost
- Significant Risk
What is Position Trading?
Position trading is a long-term strategy for trading financial assets, including forex, comex, crypto, stocks, and indices.
As the name suggests, position trading is based on holding a trade position for several days, weeks, or months to profit from an asset’s price fluctuation.
Position Trading Strategy Example
Suppose a passive trader wants to start trading in currencies. According to his analysis, due to the US’s continuous Development and increasing global popularity USD is all set to rise against the EURO in the upcoming months.
Let’s consider, trader bought 1 standard lot of USD/EUR (or sold 1 standard lot of EURUSD)
So, the trader bought the standard lot size of the USD/EUR pair at the exchange rate of 0.91, investing €91000. After three months, the exchange rate of the pair rose to 0.95.
The trader decided to close the position. In this case, his profit is 4000 {100,000 * (0.95-0.91)}.
3-Monthly Return = (4000/ 91000) *100 = 4.40%
Therefore, annual return = 4.40 * 4 = 17.60%
That’s how position traders make money in the market.
Features of Position Trading
For a better understanding of position trading strategy. Let us look at the strategy’s key features that differentiate it from others.
Time:
Position trading is a long-term strategy. You may have seen traders placing one trade daily or scalpers placing between 10 to 100 trades daily.
However, position traders are passive traders; they place very few trades in a year, depending upon the opportunities. You don’t need to invest significant time watching your trades and monitoring charts.
Patience:
Position trading is a long-term strategy, so it takes time to profit. On the one hand, day traders and scalpers can withdraw their profit in a day.
Meanwhile, position traders have to wait for months to exit from a trade. So, position trading requires a lot of patience for the desired results.
Analysis:
Positon traders generally use a combination of technical and fundamental analysis to make trade decisions. So, one can use fundamentals that have a long-term impact on currency value.
For technical analysis, one can go for indicators including Bollinger bands, moving averages, support and resistance, breakouts, reversal, and pullback for position trading.
Suitability:
Position Trading for beginners or passive traders can be a good option. Also, it is a buy-and-hold strategy, so it is comparatively less risky.
However, the strategy requires large capital, and that too for a long period. It may not be suitable for traders with less capital or who want quick profit from the market.
Opening both positions
Position trading is quite similar to the buy-and-hold strategy. However, the buy-and-hold strategy is only limited to bullish trades.
Meanwhile, position trading allows traders to profit by opening long and short positions. So, one can take advantage of the rising and falling market with this strategy.
Advantages of Position Trading Strategies
Psychological Benefit:
Position trading is a slow process of making money in the market. Many people see it as a disadvantage, but it is the biggest advantage because it is less stressful than other strategies.
So, side hustle traders or traders with jobs or businesses can make money in the market and keep their focus on their main occupation. Simply, it does not have a big impact on traders’ minds.
Passive Trading:
Like scalping, day trading or any other strategy, you don’t need to keep your eye on every small and big update in the market. Once you have placed a trade, you can wait for the desired results and exit after a few days or months when the market moves in your favour.
Leverage:
When a person is investing money for a longer period, he is aiming for a significant amount, and for this, you need a big capital. However, one can also take benefit of the leverage facility.
Generally, brokers allow traders to trade big amounts with small capital, known as leverage. So, a trade with less capital can use this facility to place big trades.
Simplicity:
Position trading is a simple strategy, so it does not require too much technical knowledge. There is no need to keep yourself stuck to chart patterns and short-term trends or use multiple technical analysis indicators.
Also, with other strategies, traders need to make decisions quickly to avoid huge losses. However, position trading is for slow and steady traders. You can make the trade decision after proper study and analysis. Also, you don’t need to consider short-term events or market noise.
Cons of position trading strategies
Big Capital:
With strategies like day trading or scalping, one can start trading with little capital. However, if you want to become a position trader, you need a significant amount to start trading.
Also, with other strategies, one can withdraw their profit within days or weeks. However, with position strategies, sometimes it takes a year to withdraw your profit.
Trading Cost:
Position trading is an expensive process, and it can have a significant impact on your overall profit. Also, holding trades for a long period significantly increases your swap charges.
In addition, brokerage charges, opportunity costs, and spread costs can make a big amount. So, it is essential to consider the overall cost before going for a position trading strategy.
Risk:
Position traders place few trades in a year. However, the capital invested per trade is big, so the outcome is. So, if the market moves against the trader, he can lose a big amount. Ultimately, you may suffer big and unexpected losses.
Conclusion
Position trading strategy is a great way to start your trading expedition. Many traders don’t want to take big risks or don’t have time to monitor the market daily.
For such traders, position trading is the most suitable strategy. However, you may not be required to monitor charts continuously or spend too much time trading, but knowledge is a must.
Every strategy requires certain analytical skills and qualities. You are investing significant money in trading, so without such skills, you may lose your entire capital.
So get well versed with the market, embrace patience, identify potential opportunities, and start trading financial assets using this strategy.